Home equity provides cash flow option

Did you know demographers – the people who track people – predict roughly 1,200 Canadians will turn 65 every day for the next 20 years?

In other words, more than 8.7 million people will be looking to pensions, savings and government subsidies for their income during that time period, according to Statistics Canada.

Unfortunately, for many of those people, those sources of income might not be enough to get them through 20 or 30 years of retirement. It’s the downside of the new aging reality … people live longer, but that means they need more money to do so.

It is a bit of a conundrum, says Chris Hoeppner, from HomEquity Bank, the company behind Canada’s only reverse mortgage program for the past 27 years. People need more money to live longer, he adds, but the trouble is, most of their savings are tied up in the home they struggled to pay off while they were working.

“There are many people who are house rich and cash poor,” he states. “They did what they were taught, and did a really good job of paying off that mortgage, but they didn’t have much opportunity to save, so their cash flow is a problem now that they’ve retired.”

People who need money traditionally turn to banks for loans or lines of credit, and that’s great if you have the credit history and means to pay back the money borrowed, but, says the HomEquity Bank business development manager, it’s not something everyone can qualify for. And that’s where the Canadian Home Income Plan – better known as CHIP – comes in.

Hoeppner says people tend to know the program as a “reverse mortgage” because it’s a mortgage that doesn’t decrease over time. Instead, it increases as interest is added to the mortgage because there are no payments once the borrower has received the cash.

“Basically, it’s just a normal mortgage that doesn’t have [regular monthly] payments,” says Hoeppner. “The idea is to create flexibility for seniors who have equity in their homes. We’re just trying to make seniors’ lives more comfortable.”

The concept is simple enough, Hoeppner offers. Anyone 55-plus with enough equity in their home can apply and, subject to an appraisal of the home, receive up to 50 percent of the value as a mortgage. CHIP does not look at income, health or credit histories to make its determination, so almost anyone with equity can qualify.

If it sounds too good to be true, Hoeppner admits “the most common thing I hear when making a presentation is, ‘What’s the catch?’ But there really isn’t one.”

He says the company’s business model means it makes its money at the back end, when the house is sold or the mortgagee no longer owns the home.

The biggest concern people have about CHIP is whether they will end up owing more than the house is worth if they live long enough.

“We guarantee that you will never owe more than the house is worth,” he says.

Should such a day come – and it almost never does, he notes – it’s the company’s loss because that’s the risk it assumes.

Naturally such a mortgage – one for which you never have to make a payment – comes with a certain cost, which Hoeppner says is typically two percentage points higher than standard mortgages.

“If you’re tight on cash flow, or you have bills that you’re having trouble paying, and you don’t want to have to leave your home, then this is a great option,” says Hoeppner. “What it comes down to is this: Do you want to make payments or not?”

Asked whether the CHIP program consumes all of the equity in a home, Hoeppner says steady growth over time in the housing market means that rarely happens. “Most will still have something left for the kids,” he offers.

He also notes that most people are changing their attitudes towards retirement living because it is so expensive.

“It’s unrealistic, for many people, to leave their biggest financial asset alone until they’re 90,” Hoeppner opines. “The CHIP program gives them another option.”

So what about the horror stories one hears about reverse mortgages? Well, Hoeppner’s response is simple – it’s the difference between the Canadian and American models. There are basically three issues people keep hearing about, and they’re all an American problem, he states.

In the U.S., lenders are highly aggressive and there is usually no cap on the total debt that can be accumulated, so when house values tumble, the companies will sue for the difference.

Also, with CHIP, renewals are automatic, but in the States people have to re-qualify, which means they might be disallowed, and then be forced to pay out when they don’t re-qualify.

And finally, says Hoeppner, American rules are often such that when one half of a couple dies, the debt becomes due and payable, which is specifically avoided with CHIP.

The bottom line, says Hoeppner, is that the CHIP program offers tax-free money that can improve cash flow and make life easier. Whether it’s right for a specific person depends on that person’s specific circumstances, and the best way to find out more is to contact a mortgage broker or CHIP directly, he offers.